Archive - Oct 15, 2010

Volatility is King in the Cotton Market where the market trades Limit Up and Limit Down More Frequently than Interest Rates are Lowered.

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Looming losses from the mortgage scandal dubbed “foreclosuregate” may qualify as the sort of systemic risk that, under the new financial reform bill, warrants the breakup of the too-big-to-fail banks. The Kanjorski amendment allows federal regulators to pre-emptively break up large financial institutions that—for any reason—pose a threat to U.S. financial or economic stability.

In 1931 Capone was indicted for income tax evasion. Attempting to bribe and intimidate the potential jurors, his plan was discovered by Ness's men. Following a long trial, he was found guilty on income tax evasion. In Alcatraz, where tight security and an uncompromising warden ensured that Capone had no contact with the outside world, Capone's control and interests within organized crime diminished rapidly...

As observant readers will recall, the one proximal catalyst that brought down the financial system last time around was something as innocuous as a rating agency downgrade of AIG, which precipitated a waterfall of margin calls and liquidity deficiencies, resulting in the near collapse of capitalism. This in itself was not surprising: it is always the least expected events (i.e., Moody's performing its function honestly and ethically) that tend to have the most adverse impact in a precarious scenario. Which is why when Moody's put MetLife's Home Loan Servicer ratings on downgrade watch it resulted in a chorus of fear and incredulity: after all Wall Street had seen this scenario all too recently. One person whose phone line off the hook was Morgan Stanley's Nigel Dally who sent out a letter to clients today trying to calm everyone down that this was not the apocalyptic event many are fearing it could be. True, as Nigel pointed out, MetLife only has $1.5 billion in mortgages serviced for others per SNL (whose data we presented yesterday when discussing exposure at JPM, WFC and BofA), but the fact that this is sufficient for Moody's to look at the company vis-a-vis its foreclosure practices should set red light everywhere. After all, in all the talk of gloom and doom, has anyone actually done any work to find out just what a home loan servicer downgrade means for the system? We didn't think so. And while MetLife is just $1.5 billion, recall that the Big Three share a quarter of a trillion among them. And yes, they are also about to be downgraded. Here is Morgan Stanley's unsuccessful attempt to make uber-nervous investor feel safe. Alas, it can only get worse from here, and what's worst, with consequences that nobody can really anticipate (ref: AIG).

Looks like Mercer's little Alaska problem had a big impact on its US DB investment consulting business...

Aww yeah, QE2 is finally on the way in news less surprising than learning another politician is a hypocrite, banks may have forged documents and been untruthful about disclosures, and Bar Refaeli is hot. QE2 became official when Ben Bernanke got in front of a room of top economists at their annual coven and clam bake in Boston (where Money McBags hears both the incantations and the soup were delicious)...

The Federal Reserve is pulling out all the stops in attempting to invigorate the American economy. The stock market is surging. Everything is surging. The optimists are crowing that all is well. Deficits don’t matter. We can borrow our way to prosperity. Cutting taxes will not add $4 trillion to the National Debt if not paid for with spending cuts. All is well. So, the question remains. Was David Walker wrong? Are we actually on a perfectly sturdy solid platform? Or, are we on the Deepwater Horizon as it burns and crumbles into the sea? Let’s examine both storylines and decide which is true.

Krugman weighs in on the side of the rule of law in the mortgage crisis

You didn't think China was just going to do the rockaway and lean back, lean back, lean back. Nope - China Daily says: "A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days" and calmly confirms what everyone esle knows: "It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active." Check to you, Tim Geithner and your currency manipulation report. What is remarkable, is how simply and accurately CD writer Li Xiangyang captures absolutely everything that Bernanke is trying to achieve.

Much noise has been made about David Einhorn's presentation of "more than a hundred" pages on St. Joe at the Value Investor Conference from earlier this week. What few however seem to know, is that this is merely round two in what is at least a three year ongoing vendetta between the Greenlighter and the Florida real estate company. On May 23, 2007 Einhorn gave what is essentially an identical presentation to the Ira Sohn conference held at the Lincoln Center. In other words, to say that this is a new idea for the hedge fund manager is certainly a stretch. Below are the full notes that Einhorn presented back then. Contrast these to today (you can read the full presentation at Market Folly). In essence the only thing that has changed is the price target: in 2007 Einhorn saw a fair value of JOE of $15, when the stock was $53. This time, when the stock was $25, he values it anywhere between $0 and $10. Could he eventually be proven right? Who knows: after all that's why he gets paid the big bucks, and has had some great calls in the past. However, his long matched calls at the 2007 Ira Sohn conference are certainly not among them. At the time, Einhorn was a fan of Helix Energy Solutions (HLX), back when the stock was $40, and now is $10, and Natixis (KN.FP) which was €13 and now is €4, both underperforming his short call materially in the past 3.5 years. A long HLX (or KN.fp)/short JOE pair trade has certainly cost anyone who put it on a pretty penny. So, as always, buyer beware. Just because a star hedge fund manager likes or does not like something, does not make it a slam dunk.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 15/10/10

Buying U.S. stocks because the Fed says it will proactively debase the U.S. dollar is like sitting on the beach in order to get a great view of an incoming tsunami. Any pleasure so derived should be short-lived, when the terror of underlying reality quickly takes hold. Given the current systemic distortions and extreme irrationality in the equity markets, a severe and violent sell-off in stocks would not be a shock, and it could come with minimal, if any, warning. It also might be coincident with a U.S. dollar-selling panic. - John Williams

Well, none really, suffice to say that we have just had approximately the 20th flash crash in the past 2 months (all in rehearsal for when Apple goes bidless). After all this is to be expected when trading in a computerized, roboticized, broken market. But a point to consider: the NYSE decided to cancel all trades below $27.44, so to the unlucky human who bought at $27.43 tough luck. Of course, robotic readers who sold at that price: congratulations, the NYSE and SEC has your robotic back. We are now eagerly awaiting Monday's ongoing flash crashes.

Good news: the man who coined the phrase Digital Dickweed is gone; The Better news: he will be reunited with former CNBC colleague Charlie Gasparino. The Best news: the Fed did not buy Dennis' contract on behalf of taxpayers. Which is odd - the Fed is now in the business of buying EVERYTHING.